Paying the Owner Is a Deduction Question, Not a Pricing One

Owner-managed businesses in the UAE usually meet transfer pricing through a rule that is not, strictly speaking, transfer pricing. There may be no cross-border group and no intercompany trade at all, and the company can still have a material exposure because of what it pays its own shareholder.

Two sets of people, not one

The Corporate Tax Law defines Related Parties in Article 35 and Connected Persons in Article 36, and they are not the same population. Article 35 is about ownership and control: 50% or more of an ownership interest, or Control, plus natural persons related within the fourth degree of kinship, permanent establishments, partners in an unincorporated partnership, and the parties around a trust or foundation.

Article 36(2) is narrower and more personal. A Connected Person of a taxable person is an owner of that taxable person, a director or officer of it, or a Related Party of either. Article 36(3) then defines an owner as any natural person who directly or indirectly owns an ownership interest in the taxable person or Controls it.

Article 36(4) adds partnerships: where the taxable person is a partner in an Unincorporated Partnership, every other partner is a Connected Person, and so is any Related Party of that partner.

The consequence is different, and it only runs one way

This is the distinction that matters in practice. Article 34 requires transactions between Related Parties to meet the arm's length standard, and an adjustment can move income in either direction depending on where the mispricing sits.

Article 36 is a deduction rule. A payment or benefit provided by a taxable person to its Connected Person is deductible only if and to the extent it corresponds with the Market Value of the service, benefit or otherwise provided, and is incurred wholly and exclusively for the purposes of the business.

Both limbs have to be satisfied. A payment can match Market Value precisely and still fail if it was not incurred wholly and exclusively for the purposes of the business — a personal expense settled by the company does not become deductible by being priced correctly. The rule also applies without prejudice to Article 28, so the ordinary deduction rules still have to be met first.

How Market Value is established

Article 36(5) sends you back to Article 34: to determine whether a payment corresponds with Market Value, the relevant provisions of the arm's length article apply as the context requires. That means the same five prescribed methods and the same requirement to demonstrate why another method was used, applied to a director's salary or a shareholder's management charge.

It is worth being blunt about the practical implication. Owner remuneration set by reference to what the business can afford, or to what the owner needs, is not evidence of Market Value. What an unrelated person would have been paid for the same role, with the same responsibilities, is.

Two categories of business are outside the rule entirely

Article 36(6) disapplies the deduction restriction for a taxable person whose shares are traded on a Recognised Stock Exchange, and for a taxable person that is subject to the regulatory oversight of a competent authority in the State. A further category may be added by Cabinet decision.

The logic is that both already face external discipline on related party dealings. It also means a regulated entity and an unregulated one, paying identical director fees, are in different positions under this article.

Where the documentation obligation sits

Article 55 covers transactions and arrangements with Related Parties and Connected Persons together. So even where a company has no Related Party transactions at all, payments to its owner and directors are within the scope of the information the Authority can require, and it has thirty days to produce support after a request.

For a free zone company the stakes are higher again, because compliance with Articles 34 and 55 is a condition of Qualifying Free Zone Person status rather than a computation rule.

What to check

1. List every payment and benefit to owners, directors and officers, including non-cash benefits, and anything paid to their relatives.
2. For each, record what was actually provided in return, and evidence of what an unrelated person would have been paid for it.
3. Separate the two limbs deliberately: is it Market Value, and was it incurred wholly and exclusively for the business? Both must hold.
4. Identify amounts that exceed Market Value and disallow the excess rather than the whole payment, since Article 36 operates to the extent of the mismatch.
5. Check whether the exemptions in Article 36(6) apply before doing any of this work, because a regulated entity is outside the rule.
6. Where the company is in a free zone, treat this as a status question, not a deduction question.

Article references are to the consolidated Corporate Tax Law incorporating its amendments. Confirm the position for your own facts and your own tax periods before relying on it.